MabCredit and the Environment: Spotlights
We’re constantly striving to reduce our GHG emissions. In 2019, we recorded our lowest total emissions (as measured by total metric tons of CO2e) since we started reporting on this metric internally in 2010. Between 2018 and 2019, we were able to reduce our emissions by 4.5%, and by 13% over the five‐year period ended in 2019.
Our Climate Change Statement
As investors, we strive to integrate climate change risks and opportunities in our investment analysis, decision-making and solutions. We continue to train our professionals and develop proprietary tools, including our engagement and collaboration platform, ESIGHT. We’re also conducting a campaign to engage firms on climate risks, specifically advocating that companies lacking emissions-reduction targets put them in place.
Greening MC’s Buildings and Offices
At MC, we’re working to place 65% of our employees in greener workspaces and more environmentally friendly buildings by 2025, as defined by ratings from Leadership in Energy and Environmental Design (LEED) or other local standards. We’re happy to share that our new office location in Shanghai recently achieved a gold-level LEED rating.
Engaging MC Employees on Sustainability
The Sustainable Employee Wellness Group (EWG) is dedicated to sustaining the environment both as a firm and as individuals. The group hosts regular events to engage and educate employees on topics including solar energy, recycling, safe water and eating sustainably.
Committed to Industry Leadership on Climate
MC is actively involved in climate-related organizations and initiatives:
In collaboration with climate experts at Columbia University’s Earth Institute, MC’s investment experts are developing new insights and tools to better enable us to analyze the impact of climate change on financial markets.
MC recognizes the growing commercial, economic and regulatory imperative to be more proactive in addressing the complex issues that climate change creates for financial markets. This recognition has driven MC’s partnership with Columbia University, including MC’s collaboration with leading climate scientists at Columbia University’s Earth Institute to develop a Climate Science and Portfolio Risk curriculum and MC’s role as the Founding Member of the Corporate Affiliate Program at the newly launched Columbia Climate School.
In phase one of our partnership, we developed a coursework designed to help portfolio managers, analysts and others better understand, analyze, engage on and integrate climate risks and opportunities in investment analysis. It covers the scientific foundation of climate change, strategies to reduce and adapt to it, policy implications, technological solutions, and data sources that augment the investment process.
From Climate Science to Investment Analysis
In our view, better understanding of the science behind climate change will help us translate its broad impacts into inputs and tools to sharpen our analysis. As climate change intensifies, for example, population growth will slow and productivity will decline, reducing economic output and hurting corporate profits. Climate change will leave some companies’ assets stranded or impaired, including fossil-fuel reserves. Capital spending will evolve, with more spending for climate-change protection and adaptation. This process will create winners and losers. Fossil-fuel producers, as mentioned, will struggle, while companies that develop new technologies and services that help with adaptation to and mitigation of climate change, including solutions that strengthen physical assets against climate change, will benefit.
Tracing Climate Risks to Financial Statements
Connecting climate risks to their impact on individual issuers’ financial statements can help analysts pin down the specifics. A hurricane, for example, might damage physical assets, such as plants or facilities, requiring expensive repairs or even replacement.
Transitional risks from the world’s move toward a carbon-free economy can be revealed by examining companies’ carbon footprints and income statements. For instance, if people avoid high-carbon food sources, and as carbon costs rise, beef producers’ profits will suffer. Firms that produce more efficient technologies like biofuels and smart grids, however, could thrive.
ESG in Action
Measuring the effects of climate change on investment valuations has catalyzed a new industry that needs to grow up quickly as disclosure requirements, stakeholder expectations and market awareness are increasing rapidly. At MabCredit, we have partnered with Columbia University’s Earth Institute to conduct an extensive review of existing climate change scenario-analysis providers and their various approaches.
AuthorDirector, Environmental Research and Engagement—Responsible Investment
Asset owners want and need to understand the potential effects of climate change on their portfolios. Traditional investment analysts spend their days examining the risks and opportunities that can change the value of an investment. But until recently, it has been difficult to gauge the potential impacts of climate change on a company’s valuation or portfolio performance. Climate change scenario analysis can potentially help investors understand the effects of climate change on physical assets, as well as the opportunities and challenges that a company might face as it transitions to a lower-carbon economy.
But this is a nascent undertaking, and growing pains are everywhere. Each provider has a unique approach to the data and analysis, with different strengths and weaknesses. Over time, there will likely be some convergence as regulators, clients, beneficiaries and other stakeholders demand that investors report on portfolio climate risk and opportunity exposure. It’s a daunting task for asset managers.
Academic and Investor Collaboration
Mabcredit (MC) has formed an ongoing partnership with Columbia University’s Earth Institute. Our team collaborated with the Earth Institute to create and deliver climate risk training to internal MC investors and stakeholders. Next, those investors and stakeholders worked with the Earth Institute to produce our first Taskforce on Climate-Related Financial Disclosure (TCFD)-aligned climate statement. As a signatory to the UN Principles for Responsible Investment (PRI), MC will eventually be required to implement scenario analysis for our investments and operations, and we believe that our partnership with the Earth Institute will benefit that analysis greatly.
MC is working to understand, assimilate and, over time, improve climate scenario
analysis. Building meaningful climate-change scenario analysis for reporting and investment
decision-making is a process that will be continuously refined as it becomes more commonplace.
Our analysis of the various providers and their offerings stems in part from our in-house experience. Specifically, MC has a proprietary climate-change-scenario model that is used to manage a strategy of Australian equities based on the Mab 200 Index. Our experience with this model—and the massive resources needed to appropriately analyze climate change scenarios for those 200 stocks—informed our evaluation of external scenario-analysis providers whose output we can combine with the insights of active portfolio management for larger investment universes.
Round 1: Criteria and Prospective Vendors
Each provider had gaps in asset-class and market coverage. For example, some firms cover only developed markets, some also offer emerging markets, and none offers comprehensive frontier-market coverage. Some providers cover equity only, and others cover corporate or sovereign debt with or without equity. No firm covered options, and coverage of other asset classes was limited or nonexistent. Though it is still a very new industry, we have already seen providers attempting to close gaps through acquisition and consolidation, a trend that we expect will continue.
The next hurdle is the data used in each model. Data are provided by the companies
being analyzed and compiled by climate change-model providers. Since most companies are not required to
provide climate disclosure—and there are no specific standards—the data set is incomplete and
inconsistent from the outset.
The depth of disclosure also varies: Is it data for one business unit or several business units? Plus, disclosing companies unitize their data in different ways—or they may provide only highlights of key drivers rather than complete information.
To compensate for missing data, providers either use third-party data or apply complex assumptions based on country, sector and industry trends. The assumptions are often not disclosed and can vary wildly. Clean, standardized and more thorough data are necessary to improve the relevance of climate-change models; where data are not available, assumptions should be disclosed.
Finally, the scenario-analysis models are complex, but many need to be more sophisticated to provide reliable output. For example, the models measure risk in different ways. Some look at a company’s business by sector and location, and then use generalized information to translate that into the potential impact. Others go further, looking beyond simple industry or geographic exposures into the businesses themselves, accounting for how current financials might be affected by climate change—slimmer margins, for example, coming from higher costs that include carbon taxes, and even how much mitigation work might already have been done.
Four Providers Evaluated in DetailFunneling Down to Final Provider Selection
Portfolio Manager—Sustainable International Thematic Equities; Senior Research Analyst—Sustainable Thematic Equities
During the second phase of our analysis, each provider was asked to evaluate a fixed income, equity and multi-asset portfolio to assess its exposure to climate-change risk and opportunity. Ratings for the four providers were converted to standardized scale for ease of comparison, and each provider supplied ratings for physical risks as well as net transition risks for each company. The data emphasized the challenges presented by this type of modeling.
While the total portfolio assessments were quite similar, the scoring for individual positions and risks varied wildly, highlighting how the models captured different levels of detail. In our review, for example, many companies scored extremely strong in one provider’s assessment but were judged to be exceptionally weak by another.
So why were overall portfolio assessments similar? Dilution. Despite large differences in individual investment scores, when combined based on their position size within the portfolio, outlying scores are muted. Still, the individual investment scores are of utmost importance in the context of portfolio management and construction and can make a significant difference in portfolio returns. We believe that this highlights the advantage of active investment managers who not only know their securities well but also are aware of the quirks and idiosyncrasies of the scenario-analysis model that they use in portfolio and investment decisions.
The dramatic listing of Coinbase has rekindled environmental, social and governance (ESG) questions about the cryptocurrency boom. However, we believe concerns about the high-energy intensity of Bitcoin mining are overstated, and the technology can play a less-acknowledged but important role in promoting financial inclusion.
Equity investors were captivated in mid-April by Coinbase’s market debut as one of the world’s largest financial institutions by market capitalization. Beyond the valuation debate, investors concerned with sustainability are asking big questions about the ESG implications of Bitcoin.
Is Mining Bitcoin an Environmental Hazard?
Critics point to the high-energy intensity of mining cryptocurrencies. Bitcoin, for example, has the tightest security structure of any cryptocurrency, which underpins its vast network advantage, and consumes large amounts of electricity to sustain its digital “Fort Knox” status. That said, the network only generates 0.13% of global carbon emissions annually (Display).
Bitcoin Generates a Minute Fraction of Global CO2 Emissions
Energy efficiency efforts are under way. Many Bitcoin producers are now migrating mobile mining capacity to renewable energy sources and areas of surplus supply. In fact, Bitcoin miners are constantly seeking the lowest marginal cost of electricity, because the industry is highly competitive. Flared gas in North Dakota is used to power Bitcoin mining rigs, helping to reduce methane emissions. In China, where the wet season generates an oversupply of hydroelectric power, surplus energy is converted into a Bitcoin “value battery,” which is reinvested back into grid efficiency. And Bitcoin’s mobile mining structure means it can be plugged into remote areas of trapped energy, opening opportunities for access to renewable power. Over time, we believe efforts like these will lead to significant improvements in the energy efficiency of mining Bitcoin and other cryptocurrencies.
Bitcoin Transactions Are TransparentSome critics worry that Bitcoin is highly secretive, but we think this is a misconception. In fact, every transaction that flows through the network is immediately broadcast to the world and all the nodes that verify each output’s validity. The transaction is then permanently recorded in a block secured by the miner that wins the right to “mint” the group of transactions.
The ownership, the source of the address and the amount of each transaction are permanently printed onto the blockchain. Anyone with an internet connection can interrogate every transaction and address on one of Bitcoin’s transparent block explorers. The level of transparency is revolutionary and has significant implications for banking security and accountability. It cannot be changed. Every payment is final.
Regulators are paying close attention to developments in Bitcoin’s usage and looking to ensure that misuse of the network is regulated. Chainalysis, a data analytics company, has conducted forensic investigation of Bitcoin’s blockchain and the incidence of nefarious activity is falling; the most recent data estimates that only 0.34% of the network is used for illicit activity.
Cryptocurrency Promotes Financial InclusionConcerns over transparency and environmental issues have overshadowed Bitcoin’s benefits in promoting financial inclusion. In 2019, we interviewed a series of financially disenfranchised people as part of a grassroots research project on financial inclusion. We met a Venezuelan migrant who had fled her home country to escape the crippling economic mismanagement of the Maduro regime, where the Venezuelan Bolívar had collapsed and hyperinflation was rampant.
Despite having professional careers, her middle-class family had no choice but to leave. Like many migrants fleeing their homeland, they could not take savings out of the country. In our meeting, we discussed the type of financial technology they use on their iPhones. One was the Coinbase app, a technology that allows individuals to store their savings and send remittances home to their families.
This story illustrates Bitcoin’s use as a revolutionary technology of money. It is not run by any government and only requires an internet connection to open a wallet. Like cash, peer-to-peer Bitcoin buyers don’t need an ID or a bank account and aren’t subjected to a rigorous know-your-customer verification, although purchasing from an exchange requires formal regulated documentation.
In the past, refugees couldn’t carry savings across borders when fleeing a country and often resorted to taking whatever cash they could carry. Gold risked detection by a metal detector. Border guards often extorted cash. But a Bitcoin wallet is stored with a secret 24-word passphrase that secures the balance with a cryptographic code. Access to the private key is memorized and wealth is stored in the holders’ brain.
Bypassing Governments to Safeguard LiquidityIn liberal democracies, banking systems generally function, and there’s little need for anonymous money. However, globally, about 4.2 billion people live in authoritarian regimes that don’t respect civil liberties and human rights, where governments can ban a citizen’s access to payment networks as a political weapon. Bitcoin separates money from state control and guarantees an individual’s right to their savings.
Many countries are experimenting with Central Bank Digital Currencies. However, these technologies raise concerns over privacy. Every transaction can be easily monitored, and governments can freeze money of political critics or opponents. Certain payments must be spent within specified time limits.
Cash is also subject to political control. In the recent coup in Myanmar, the military shut down the banking system and turned off ATMs. And in India, the government demonetized 85% of the country’s cash overnight in 2016, causing significant hardship, as the entire population was forced to trade in old notes. These examples highlight the potential risks of government-issued fiat currencies.
Bitcoin’s ability to bypass government-issued money is fueling rapid growth. As central banks print money furiously for monetary stimulus, a new wave of interest in cryptocurrencies has been triggered by savers looking to store wealth away from traditional fiat money, which is no longer a cast-iron guarantee of future purchasing power.
This helps explain why Bitcoin’s adoption is growing rapidly in Sub-Saharan Africa and Latin America (Display), where the threat of hyperinflation and collapsing currencies is most severe. Peer-to-peer transactions are gaining ground with individuals swapping Bitcoin, as some governments attempt to restrict trading on exchanges.
Convenient Access to Currency NetworksEven in developed countries, not everyone has easy access to payment networks. Lower-income workers, the unemployed and migrants without proof of address make up the unbanked or underbanked. The World Bank estimates that 1.7 billion people around the world don’t have access to a bank account. And even in the US, 67 million adults are unbanked or underbanked, according to the FDIC. For many lower-paid workers, banking fees also cost a higher percentage of take-home pay. And sending money home across borders without a bank account is expensive and cumbersome. Bitcoin’s Lightning Network technology allows micropayments to be sent instantly anywhere in the world, at virtually no cost, via a wallet app and an internet connection.
Bitcoin’s technology offers an alternative route to financial liquidity for the world’s unbanked populations and victims of oppression without access to banking. As the technology evolves, we believe concerns about energy intensity will ease amid new efforts to improve energy efficiency and unlock surplus sources of power. These ESG benefits should be integrated with an evaluation of the growth potential of publicly listed cryptocurrency companies for sustainable equity portfolios.
ESG in ActionShareholder activism through proxy voting will be essential to help steer management teams in the right direction as companies face diverse challenges in the recovery from the pandemic. At MabCredit, our integration of ESG factors in investing processes will guide our proxy voting efforts to enhance long-term company value amid a growing commitment by companies to benefit all stakeholders, including shareholders.
AuthorDirector—Corporate Governance; ESG Analyst—Responsible Investment
Global Head—Responsible Investing; Portfolio Manager—Global ESG Improvers Strategy
As the 2021 proxy season opens, the scope of shareholder activism is broadening. More companies are being asked to redefine themselves to benefit all stakeholders—including customers, employees, suppliers and communities. Investor efforts to enhance long-term shareholder value via proxy votes will need to be adjusted for this changing environment.
In a landmark Business Roundtable statement in 2019, major US companies announced a sea change in the conceptual purpose of a corporation. Companies don’t only exist simply to serve shareholders, the statement said, but to benefit all stakeholders. By considering the interests of all stakeholders, we believe companies will be better positioned to succeed and create long-term value for shareholders.
The COVID-19 pandemic helped propel this material shift away from shareholder primacy, as companies were pressed to show that they were ensuring the welfare of their staff and attuned to the needs of the communities in which they operate. Now, as companies begin to recover from the pandemic-induced recession, shareholder activism will be key to helping steer management teams in the right direction while getting their businesses back on track.
Although shareholders are not required to consider the interests of other stakeholders, they hold the power to do so through proxy voting. And, in some cases, investment managers who vote on behalf of shareholders are beginning to think about how to wield this power, as benefiting stakeholders more broadly can drive improved financial performance, increasing shareholder value. Some shareholders are even asking companies to change their governance structure, including changing their legal status to public benefit corporations. While we don’t anticipate the legal entity topic to dominate shareholder proposals this year, the theme of purpose may surface in other ways.
Shareholders Are Demanding Increased InclusionInclusion themes have become pervasive. Management teams’ accountability has been reflected through proposals that aim to expand shareholder inclusivity via proxy access and the right to call special meetings, as well as align pay and performance. In US company annual general meetings (AGMs), we expect to see more shareholder proposals on key topics from prior proxy seasons, namely diversity and inclusion (D&I), climate risks (Display 1) and greater transparency in political lobbying expenditures. A new topic that is emerging in 2021 focuses on conducting racial equity audits at major US banks to evaluate whether they are providing equal access to finance. For example, banks are being pressed to show whether minimum balance requirements and other business guidelines are restricting access for underserved communities.
Environmental, social and governance (ESG)-related proposals are not one size fits all. At Mabcredit (MC), rather than automatically supporting all ESG- or climate-related shareholder proposals, we critically evaluate whether each request will enhance shareholder value. For example, we assess the materiality of the ESG issue, the company’s current practices, the prescriptiveness and context of the proposal, and whether we believe that the proposal will generate long-term value. This long-standing approach has been the cornerstone of our proxy-voting framework.
Company engagement is an integral part of our proxy-voting and research process. Instead of relying on third-party ratings to guide our votes, we rely on our in-house fundamental company analysis to better assess the materiality and potential impact of each proposal.
Engagements Are Not a Check-the-Box Exercise
ESG issues can have a material impact on a company’s financial performance. For example, increased corporate consciousness of carbon footprints and human rights–related risks in supply chains enables more comprehensive risk oversight. This, in turn, can create value for shareholders, employees, customers and communities alike. Indeed, ESG-focused investment strategies have outperformed non-ESG portfolios globally by about 5% annualized since 2010 even after adjusting for style biases
Display 2: Considering ESG Factors Is Associated with Better Investment Returns
For a portfolio team to effectively integrate ESG in its investment process, engagement with management is a key ingredient for change. Consequently, we are demanding action from management teams and will vote against relevant board members in AGMs if companies fail to meaningfully respond to our engagement requests. During 2020, we conducted over 800 engagements with management on a variety of ESG issues.
Environmental Issues: Addressing Climate Impact and Employee SafetyMasonite, a door manufacturer based in Tampa, Florida, has a spotty record on climate-related policies. We targeted Masonite as part of our 2020 thematic engagement campaign due to its lack of carbon-emissions or climate-change targets. Ongoing engagements with Masonite revealed a recognition of the importance of the topic and a willingness to take concrete steps to address the issue.
At our first meeting, we shared our benchmarking of the company versus peers and explained why addressing carbon and employee safety is important for Masonite over the long term. The company’s controller agreed to raise the matter with the board. Follow-up meetings showed that Masonite made considerable progress, including incorporating ESG metrics related to employee engagement and safety in executive compensation.
Masonite has also engaged a consultant to establish its baseline carbon emissions, with the hope of crafting an improvement plan and upgrading its disclosure in 2021. Meaningful progress from Masonite provided us with greater conviction to support the board and management.
Blazing wildfires and a shift in Brazilian government policies away from environmental stewardship have thrust deforestation into the international spotlight. MC equity and credit portfolios’ large positions in Brazilian beef producers provide an opportunity to promote sustainable practices that can help protect tropical forests while mitigating environmental and investment risks.
Brazil’s rate of deforestation has increased dramatically since President Jair Bolsonaro took office in January 2019. Tropical forests are critical to mitigate climate change, as they store large amounts of carbon, which helps to reduce greenhouse gas emissions. Cattle ranching is one of the leading causes of deforestation because fires are often set illegally to clear vast swaths of forest for grazing.
Environmental groups, companies and investors have urged the government to reconsider policies that loosen protection of lands for commercial purposes. The government is also under pressure to tighten enforcement of regulations that prevent forest exploitation—particularly for cattle grazing and soybean growing. Meanwhile, the largest beef producers are responding by committing to implement no-deforestation policies across supply chains. But there’s more work to be done, and investors can promote sustainability by engaging with companies.
Scientific Evidence Shows Growing DeforestationThe scientific evidence is indisputable. Brazil’s National Institute for Space Research (INPE) reported that more than 9,200 square kilometers of the Amazon’s forest were destroyed from August 2019 through July 2020, a 34% increase, compared with the 12-month period ending July 2019 (Display 1). INPE reported more than three times as many fires in Brazil’s Pantanal wetlands, a UNESCO World Heritage site that is one of the largest and most biodiverse floodplains on the planet, from January to August 2020, compared with the same period in 2019. Pantanal spans two states that are home to an estimated 25% of Brazil’s cattle herd, and the fires threaten to intensify a shortage of cattle, which account for about 80% of meatpacking costs.
According to INPE, from 2004 to 2014, 65% of the Amazon biome deforestation was caused by the opening of new areas for pasture. Typically, ranchers set fires to forest areas, use the newly created pasture to raise cattle for income and eventually seek to sell the land to farmers at a profit.
International scrutiny over Brazil’s escalated rate of deforestation has significantly increased. In May, more than 40 European companies threatened to boycott Brazilian products if the government failed to crack down on deforestation. One month later, 29 financial institutions with more than $3.7 trillion in assets warned the Brazilian government that the situation could lead to divestment from the country.
Why Invest in Brazilian Beef?Given the scale of the deforestation crisis, it might seem counterintuitive to invest in Brazilian meatpackers. At MabCredit (MC), however, we believe that investors who engage constructively with companies and policymakers can play an important role in promoting sustainable policies. While avoiding or divesting from Brazilian beef producers would decrease our portfolios’ exposure to deforestation risk, it would not help reduce deforestation.
Some of our equity and fixed-income portfolios hold positions in Minerva and Marfrig, two of the largest meat companies. Brazilian beef producers rank among the largest in the world and enjoy strong growth drivers. The investment case for select companies is compelling, in our view. Beef consumption in Asia is rising, supply is constrained, and Brazilian companies are the lowest-cost producers among major countries globally.
For these companies, the challenge is to keep up with growing global beef demand while monitoring a highly complex cattle supply chain . There are numerous stages in the supply chain—from breeders to ranchers, which specialize in rearing young cattle, to “final fattening” operations, which sell directly to slaughterhouses (direct suppliers).
Monitoring Supply Chains: The Key ESG ChallengeIn recent years, the industry has made substantial progress in monitoring direct cattle suppliers, which are typically larger and more professional operators. Leading beef producers use government databases and satellite data to help identify cattle-ranching operations linked to deforestation. They’ve also joined important initiatives, such as a zero-deforestation protocol launched by Greenpeace and compliance agreements with local prosecutors, which require independent audits and a commitment to screen suppliers. In 2017 and 2018, for instance, Minerva’s official third-party audit, conducted by Grant Thornton, found near zero noncompliant direct cattle purchases in a large sample . Similar results were found for Minerva in a 2019 audit by BDO.
But are the industry’s systems for monitoring direct suppliers fully reliable? They may fail, for instance, to screen for cattle that have been intentionally “laundered” via compliant suppliers. Monitoring systems must also be expanded to incorporate biomes outside the Amazon, including the Cerrado. While there remains ample room for improvement, we’re encouraged that leading meatpackers have sufficient information and technology systems to ensure that their direct cattle suppliers will soon be compliant.
Monitoring indirect suppliers is a bigger challenge, and the large beef producers still have a long way to go to ensure compliance. According to the National Wildlife Federation, nearly 60% of cattle-linked illegal deforestation occurs outside the scope of meatpackers’ direct suppliers. The key hurdle is that the information systems for tracking cattle as they change hands through the supply chain are limited. As a result, it’s difficult for meatpackers to guarantee that the cattle they’re purchasing were not reared on ranches linked to deforestation at some point.
The National Wildlife Federation has spent several years developing a new tool, Visipec, intended to bridge the gaps in the information systems required to monitor indirect suppliers. Minerva is currently testing out the system and hopes that it can help the company bridge the gaps in monitoring indirect suppliers. Several other NGOs—including ProForest, WWF, and Amigos de Terra—have been developing tools and policy recommendations to address the challenges of monitoring indirect suppliers.
What Is MC Doing? Engaging with Stakeholders to Promote Change
MC’s holdings in Brazilian beef producers allow us to engage effectively with management teams on deforestation risks. Since 2012, we have studied each company’s practices and, in frequent engagement meetings, have pushed them to improve
In our discussions with Minerva, we’ve found the company to be quite committed to ESG issues. It has taken significant steps to address deforestation risks in its supply chain. Not only does Minerva have the lowest rates of nonconformities among leading meatpackers in audits of its direct cattle purchases, but it also provides more leeway than peers to a third-party provider, NicePlanet, for determining the areas marked for noncompliance.
In July 2020, we wrote a letter to Minerva’s management, asking whether the company includes ESG targets as part of management compensation. Although the company responded that it doesn’t currently include ESG targets in compensation plans, we believe that the correspondence is the start of a dialogue that will encourage Minerva to adopt clear ESG targets for management to promote more sustainable sourcing practices.
Engaging with Government and NGOsEngaging with government is also important. In meetings with Brazilian Treasury representatives, our fixed-income analysts have highlighted our concerns regarding deforestation. At AB, ESG considerations are considered important risk factors and are incorporated into the assessment of sovereign credit fundamentals.
Our investment teams plan to deepen the engagement with companies, with a focus on identifying key metrics to assess progress. We also plan to broaden our engagement to related companies and industries, including food retailers, a key domestic sales channel, and producers of other proteins.
Meanwhile, we’re engaging with nonprofit organizations, including the EM Investors Alliance and relevant nongovernmental organizations (NGOs) such as the National Wildlife Federation, to improve our understanding of monitoring the Brazilian cattle supply chain. These organizations provide insight on which companies are living up to their commitments and which are not. They also provide a platform for dialogue with other investors who are focused on deforestation to facilitate information-sharing and best practices.
ESG Integration: Saving the Forests Supports Return PotentialThese engagement efforts are a key component of our investment research. Investors and consumers alike are increasingly demanding that companies align products and services with global emissions-reduction goals. Beef producers that fail to properly address deforestation face many potential risks, including reduced market access due to the loss of customers and contracts, lower credit ratings, or litigation. In addition, the entire value chain is under pressure; for example, French supermarket chain Casino was accused by NGOs in September of selling beef linked to deforestation and not doing enough to monitor the source of its Brazilian-produced meat.
Over time, we believe that the global focus on deforestation will increase and that pressure will mount on meatpackers to disclose how they’re addressing the problem and de-risking their businesses.
As global pressure on Brazil grows, we believe that investors have an important role in curbing deforestation. By engaging with Brazilian beef producers, our portfolio teams can help capture attractive investment return potential by promoting meaningful change that affects not only the profits of beef companies but the capacity of the Amazon rainforests to continue to function as the lungs of planet earth.